Suppose that it is known for certain that the demand for wheat this year is identical to the demand for wheat next year. This year’s wheat crop of 100 tons has just been harvested. Everybody believes that next year’s wheat crop, which has already been planted, will also be 100 tons. Now a speculator arrives on the scene, convinced that next year’s crop will be only 80 tons.
a. If wheat can be stored costlessly, what will the speculator do? What happens to this year’s wheat supply and to next year’s? (If it helps you, assume an interest rate of 0 %.)
b. How long does the speculator continue this activity? What is this year’s wheat supply when he is finished? What is next year’s wheat supply when he is finished if he turns out to be right? What is it if he turns out to be wrong?
c. Use a graph to show the social gains with and without a speculator, on the assumption that the speculator is right. If he is right, does he improve social welfare?
d. Use a graph to show the social gains with and without a speculator, on the assumption that the speculator is wrong. If he is wrong, does he improve social welfare?